In case you didn't know it there has been an exodus from tech and biotech stocks so far in 2014. Since January 1, the tech-heavy NASDAQ Composite Index has fallen over 5%. The 100 biggest stocks in that index, the NASDAQ 100, are off by 4% this year.
Some individual stocks like Amazon.com (NASDAQ:AMZN) have taken even more of a beating, as Amazon.com is down 21% since mid-March (and 15% since Jan. 1). The shares of other companies in the index, like Apple (NASDAQ:AAPL), which comprises 20% of the NASDAQ by capitalization value, and Google (NASDAQ:GOOG), have not fallen quite as much so far this year.
Will Apple and Google soon join the list of free-falling stocks? Is Amazon down for the count after its fantastic run-up?
Buy a good company at a fair price
The prime reason for the Amazon sell-off was probably perceived valuation. Even after the three-month-plus plunge shares of Amazon are selling for over 500 times the company's earnings. Earlier this year, the P/E for the stock reached a stratospheric 1,403. Investors don't think it is worth buying in at elevated valuation levels in spite of the company's double-digit revenue growth rate over the last few years, great management vision and execution, and domination of its markets.
The stocks in the NASDAQ Composite have an average P/E of 18.4. This is slightly elevated over historic standards, although it remains below the levels where it sat when the tech bubble burst about 14 years ago. The multiple was 90.2 back then. The 2000 bloodbath in tech probably will not repeat.
Apple and Google (A shares) have reasonable multiples of 13 and 15 respectively which are below the overall index multiple and the long-term averages for the companies. Investors may not see their shares as overpriced and that might help explain why these stocks haven't fallen as steeply.
Searching for fire
The decline at Amazon probably won't continue unabated and Apple and Google most likely won't join the e-commerce giant in its current slide. All three companies are high-flyers in their markets and they have continually released new products that have helped grow their businesses. Patient investors have been rewarded.
Amazon just announced Fire TV with the intent of helping to boost sales of its digital content via the living room, much like what the Kindle tablet device already does. Although Fire TV probably won't move the needle a lot it will contribute to the company's long-term growth. Also, the company still has its top-performing e-commerce and web hosting businesses humming along nicely.
Apple has been rewarding investors with stock buybacks and dividends to tide things over until a new product comes along. Smartphones and tablets, where the company ranks either No. 1 or No. 2 in both market share and profit, may not continue on upward growth trajectories forever. Therefore, a new product will be important for the future. The rumors on the Street indicate that Apple will offer at least one new product or service this year. Whether it is a smart watch, an improved TV set-top box with a content-sharing agreement with cable companies, a platform for mobile retail payments, or an iPhone with a larger screen remains to be seen.
Google is constantly refining its cash cow business, Search, and complimenting it by venturing into other areas such as interconnected home devices (Nest thermostats, smoke and CO detectors), TV (Chromecast dongle), driver-less cars, fiber-optic networks, and blimps that provide wireless access to rural areas. The company is developing analytics that show that the ads that brick-and-mortar retailers place on its web search results pages are indeed paying off and this could result in even more success down the line.
The recent tech sell-off is getting much media attention. Nobody can predict how long the drop will continue with any degree of accuracy. However, much of the hype probably is not warranted. The overall market valuation doesn't look all that scary in comparison with the big bubble of 14 years ago. Unless earnings growth drops or disappears altogether over the long-term, things look OK.
One prominent member of the tech-heavy NASDAQ Composite index, Amazon, has dropped even more than the overall market. Two other big members of the index, Apple, which is the top dog by capitalization, and Google, have also sold off but not by as much.
However, the three companies probably will not stay down for long. Amazon and Google have very wide moats and they are the dominant players in the markets where they compete. Apple is poised for further growth down the road with anticipated new products and services. If the past is any guide, when users snapped up new Apple products by the millions, the good times will continue in Cupertino.